Using the Return on Investment Template

[Pages:15]THE BUSINESS CASE FOR QUALITY IN MEDICAID MANAGED CARE

Using the Return on Investment Template

Developed in collaboration with: The Center for Health Care Strategies

May 2007

Kristin Reiter, PhD1 Kerry Kilpatrick, PhD1 Sandra Greene, DrPH2,1 Sheila Leatherman, MSW1 1Department of Health Policy and Administration, University of North Carolina at Chapel Hill 2Cecil G. Sheps Center for Health Services Research, Chapel Hill, NC

Acknowledgements The development of the return on investment template and the related supplemental instructional manual were supported by a grant from The Commonwealth Fund. The authors gratefully acknowledge the valuable input of Stephen Somers, Melanie Bella and Allison Hamblin at the Center for Health Care Strategies, and the excellent

research assistance of Emily Keyes.

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TABLE OF CONTENTS

Introduction

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Why Care About the Business Case?

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What is a Business Case?

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The Components of the Payer Business Case Analysis

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Things to Consider Before Undertaking a Business Case Analysis

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Instructions for Using the Return on Investment Template

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Proposed Use

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Design of the ROI Template

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The Data Entry Spreadsheets

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Tab 2. Initial Investment Cost Data

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Tab 3. Operating Cost Data

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Tab 4. Paid Claims Data ? Intervention

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Tab 5. Paid Claims Data ? Control

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The Output Spreadsheets

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Tab 6. Paid Claims Data ? Incremental

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Tab 7. Return on Investment Analysis

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Tab 8. Incremental ROI Analysis

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References

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Appendix A ? Sample Business Case Analysis

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Using the Return on Investment Template

The purpose of this instructional manual is to introduce the rationale for establishing a business case for implementing quality enhancing interventions (QEIs) in health care, and to present step by step instructions for using the return on investment template to collect and display the required data. The template is intended to provide a general starting point for retrospectively analyzing the business case; however, no two settings or QEIs are precisely the same. Therefore, users need to be mindful that some customization of methods may be required in any application.

INTRODUCTION

Why Care About the Business Case?

1. Absent a convincing business case it is unlikely that quality interventions will be sustainable over the long run. While commendable, good intentions can only go so far toward convincing providers (and payers) to adopt QEIs.

2. In cases where an organization has determined that the evidence base warrants the adoption of a QEI, having information about the business case provides a more complete picture of the overall consequences of the intervention for the organization.

3. If the ultimate goal is to attempt to align financial incentives to pay for quality, organizations investing in QEIs need to explicitly measure the costs and savings attributable to the interventions.

To recognize the importance of having a strong business case, one has only to look at the fact that deficiencies in the quality of health care remain prevalent despite an increasing body of evidence to guide the implementation of proven quality interventions [1-3]. Policymakers, payers, and employers continue to express their frustration that QEIs of demonstrated effectiveness are not being implemented on a broad basis. Even after decades of careful evidence-based practice research, one of the principal reasons that hospitals, health care delivery systems, and individual providers in the United States give for not implementing promising health care QEIs is that no "business case" for quality can be made. Recent case studies confirmed that, in the absence of a convincing business case, quality interventions have a low probability of widespread adoption and a lower probability of being sustained over time [4].

What is a Business Case?

The general notions encompassed in the development of a business case for quality are mostly drawn from non-health care industry. For health care, the recent interest in the business case was generated by an article in Health Affairs by Leatherman, et al.[4]. There the authors define the business case (see box below) and provide an analysis of a series of case studies, which sought to confirm the existence of a business case in a variety of commercial settings.

A business case for a health care improvement intervention exists if the entity that invests in the intervention realizes a financial return on its investment in a reasonable time frame, using a reasonable rate of discounting. This may be realized in "bankable dollars" (profit), a reduction in losses for a given program or population, or avoided costs. In addition, a business case may exist if the investing entity believes that a positive indirect effect on organizational function and sustainability will accrue within a reasonable time frame.

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As the definition suggests, a business case may exist even in the absence of a direct financial return on investment for the organization which implements the intervention. The templates, however, focus on modeling the financial consequences of a QEI. Thus, users need to consider other positive effects on the organization that are not quantified in the templates before concluding that there is no business case for an intervention.

Examples of non-financial benefits include, but are not limited to:

? Improved market recognition for quality ? Enhanced market share ? Improved employee satisfaction/retention ? Improved provider satisfaction ? Enhanced inspection and/or accreditation status ? Fulfillment of mandated requirements, e.g., conditions of participation with state

Medicaid program

Note that the definition of the business case is from the perspective of the "entity that invests in the intervention." If that entity is a primary care practice, group practice, or health clinic, the business case (return on investment) is calculated from that perspective. If cost savings or other benefits accrue to a party (including the patient) other than the one making the investment, the benefits are not included as part of the business case. In this way, business case analysis differs substantially from other types of economic analysis (e.g., cost-benefit, cost-effectiveness, cost-utility) which often measure costs and benefits from a societal perspective.[5] The perspective of business case analysis is purposely narrow since its primary goal is to determine the sustainability of QEIs from the investing organization's perspective. For QEIs that are cost-effective, business case analysis can help identify financing misalignments that may serve as barriers to adoption.

The Components of the Payer Business Case Analysis

Basically, to compute a financial business case for quality (measure the return on investment) for your intervention, you will need estimates of three things:

1. The costs incurred to develop the intervention. 2. The continuing costs of operating the intervention over time. 3. The effect on paid claims, revenues, and other quantifiable financial benefits or costs

that accrue to the organization that implemented the intervention.

Surprisingly, a review of the literature [6] found that organizations frequently were able to report on the savings or other benefits of a quality intervention, but did not report (and perhaps did not know) what the intervention cost to develop and to operate over time. The return on investment template has been developed to assist you in collecting and managing these data.

Things to Consider Before Undertaking a Business Case Analysis

1. The evidence that the QEI improves quality. If you implemented a QEI that clearly did not achieve your quality goals and would not likely be used again by your organization, then there is little sense in engaging in an analysis of the return on investment for that particular QEI.

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2. The complexity of the intervention. It is very difficult to analyze the business case for interventions that are not well-defined, do not have a specific starting date, or that are not targeted at a specific population.

3. The sufficiency of your information systems. Analyzing the business case for quality requires claims and accounting data that may not be routinely collected or reported by your organization. The data must be available, and your information systems must have the capacity to produce special reports.

A detailed checklist for determining readiness for business case analysis, and a lengthy discussion of the methods in developing a business case for quality can be found elsewhere [7].

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INSTRUCTIONS FOR USING THE RETURN ON INVESTMENT TEMPLATE

Proposed Use The return on investment (ROI) template was designed to allow payer organizations to retrospectively analyze the ROI on quality enhancing interventions (QEIs). The ROI model seeks to determine whether utilization of services by the QEI study population (and, therefore claims payments), will decrease sufficiently after the implementation of the QEI to justify the additional expenditures necessary to implement and operate the QEI.

Design of the ROI Template The ROI template is a Microsoft EXCEL model consisting of three required data entry spreadsheets, one optional data entry spreadsheet, and three output spreadsheets. Each of the output spreadsheets is linked to the data entry spreadsheets so that information flows directly to the ROI calculations. Cells in the spreadsheets are color-coded so that users can identify places where data must be input by the user and places where calculations are automatic. The color coding scheme is described below and in Tab 1 (Instructions) of the EXCEL workbook:

Green shaded cells are input cells which allow direct data input by users Yellow shaded cells are intermediate calculations

These cells contain formulas and should not be edited Grey shaded cells are key outputs

These cells contain formulas and should not be edited

The Data Entry Spreadsheets

Tab 2. Initial Investment Cost Data

General information: The first spreadsheet in the model captures the personnel and non-personnel costs required to develop the QEI and bring it to the point of implementation. A central principle for determining what costs to include is that the investment cost should reflect any cost that the organization incurred to get the QEI implemented that it would not have incurred in the absence of the QEI. Thus, in cases where the activities necessary for developing the QEI were also used for other projects or reflect ongoing business practices, then it would only be appropriate to include the portion of the costs that would not have been incurred if the QEI had not been developed. This requirement does not, however, preclude the recognition of opportunity costs. For example, a portion of the Chief Financial Officer's (CFO) time might be devoted to QEI development. The CFO's salary would be paid regardless of whether or not the QEI was developed; yet you may wish to recognize that in the absence of the QEI, the CFO could have devoted time to another project.

Cost categories have been provided as examples of the types of costs that might be incurred in QEI development and implementation. Broad categories include personnel, contracted services, office operations, equipment and construction / renovation. However, individual line items may need to be tailored to reflect the specific circumstances. It is not necessary to input data into every cell. A column for personnel names and / or notes is provided for convenience.

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Data requirements and calculations: Specific instructions for entering data, and descriptions of spreadsheet calculations are provided below.

Line 9. Reporting period: Enter the beginning and ending date for the period over which the data are reported.

Column C. FTE %: Enter the full-time equivalent percent effort devoted to the QEI by each individual involved in QEI development. For dedicated personnel (new hires or existing hires devoted entirely to the QEI) the percent effort will be 100%. For existing personnel that devote a portion of their time to QEI development, a rational allocation system should be used to determine percent effort (for example, the individual could submit timesheets tracking time spent on different projects).

Column D. Salary and fringe: Enter the salary plus fringe benefits for the relevant reporting period for all key personnel. For example, if the pre-implementation period (the investment period) is one year, enter the annual salary plus fringe benefits. If the investment period spans multiple years, enter a weighted average of the relevant annual salaries.

Column E. Cost: The spreadsheet will automatically calculate personnel costs using the formula [FTE% x Salary and fringe]. Other costs must be input by the user. For each relevant cost category in lines 43 through 58, enter the direct costs (costs incurred that are directly attributable to the QEI) for the designated reporting period. The organization's general ledger (from the accounting system) should contain detailed transactions (dates & amounts) affecting revenue, expense and capital (property, plant & equipment) accounts; however, note that costs may not be tracked by project in the accounting system and may need to be allocated using source documents (for example, telephone bills, project copy codes) or another rational allocation system.

Line 59. Subtotal, direct costs, initial investment: The spreadsheet will automatically calculate the subtotal by summing all personnel and non-personnel costs.

Line 60. Indirect cost %: Indirect costs are costs that cannot be traced directly to the QEI, for example, rental expense for space, utility costs, costs of support departments such as payroll, etc. Although these costs would be incurred regardless of whether or not the QEI was developed, a portion of indirect costs may be allocated to the QEI to reflect the opportunity cost (e.g., space devoted to the QEI could be used for something else). Since these costs are not directly traceable to the QEI, they must be allocated in a rational and defensible manner. Many organizations choose to allocate indirect costs as a % of direct costs. If you choose this method, enter a reasonable % of direct costs in this cell.

Line 61. Indirect costs, initial investment: If you entered a percentage in the previous cell, the spreadsheet will automatically calculate indirect costs using the formula [direct costs x indirect cost %]. If you choose to allocate indirect costs in another way, enter the actual indirect costs here and document the method for allocating indirect costs.

Line 63. Total costs, initial investment: This cell reflects the sum of direct and indirect costs. The amount shown in this cell flows to Tab 7. Return on Investment Analysis and Tab 8. Incremental ROI Analysis where it appears as initial investment costs in the pre-implementation period (line 14).

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